Understanding Commercial Real Estate Leases

If you’re a business owner, leasing out the right space for your company is one of the most important matters you must address. Whether you only need office space or require additional space for retail, manufacturing, or industrial needs, making sure you fully understand your obligations under a commercial lease is crucial.

If you haven’t already noticed, a commercial lease is unlike any you’ve probably encountered before. For that reason, you probably have a few questions that we commonly hear from our clients. Below, we’ll explore the answers to a few of those questions to provide you with some background information you may find useful going forward.

What Should a Commercial Lease Include?

Commercial leases contain various provisions that outline the obligations that the landlord and tenant are responsible to perform. As such, there are a few important parts and provisions included in any commercial lease.

These include the following:

  • Parties and Personal Guarantees: Descriptions of who the landlord is and who the tenant is. Each party should ensure they are signing on the behalf of their business, not personally unless the lease requires a personal guarantee. Tenants are wise to request limits on any required personal guarantees to limit their personal liability.
  • Lease Term: Terms can last anywhere from month to month to several years at a time. Savvy tenants will ask to include renewal rights to protect their interests after the initial term lapses. If renewal rights are included, be sure to see how rent may be impacted.
  • Rent: Commercial leases should clearly state what the monthly rent is, when rent is due, how rent should be paid, and if there are any grace periods for late rent.
  • CAM & Other Expenses: Commercial tenants should be vigilant about ensuring they fully understand their obligation to afford any Common Area Maintenance (CAM) expenses. These can include the tenant’s share of any maintenance and landscaping expenses. Tenants must also ensure they understand their liability for other expenses like utilities, taxes, insurance, etc.

What Is a Net Lease?

A net lease is similar to renting a property like a single-family home. Tenants are responsible for paying a base rent as well as utilities, maintenance, insurance, and any other expenses involved with using the property.

There are three different types of net leases:

  • Single Net (N) Leases are the simplest, but not very common. With these, tenants pay both rent and property taxes.
  • Double Net (NN) Leases require tenants to pay the base rent, property taxes, and building insurance. In return, the landlord is typically responsible for utility and maintenance costs.
  • Triple Net (NNN) Leases usually require tenants to pay the base rent and all costs associated with the space they’re renting, generally utilities, taxes and insurance.

What Is a Gross Lease?

There are two different types of gross leases in common use.

A full-service gross lease requires a tenant to pay a fixed amount of rent each month. The property owner then pays for all other costs associated with the maintenance and operation of the property, which often includes utilities and taxes. This arrangement is not dissimilar to prepaying for something like an all-inclusive cruise.

A modified gross lease also requires tenants to pay a fixed amount each month, except there’s room for landlords to add incremental increases. These are usually to account for operating costs that exceed the previously calculated base cost per year.

What Makes a Commercial Lease Valid?

One of the most common questions about commercial leases we get is actually a very common question for any kind of contract: What makes it valid? This is an important matter to be sure of because a poorly prepared contract may be invalid and its provisions unenforceable as a consequence.

Without straying too far into general contract law, a valid commercial lease is essentially any lease that doesn’t include illegal clauses or inherently violates the rights of the tenant. One or more illegal provisions in a commercial lease, however, may not invalidate the entire agreement. A court could find the illegal clauses unenforceable but enforce any other legal provisions.

What Is Fair Market Rent?

With regard to commercial leases, “fair market rent” is the price of rent that the tenant is willing to pay and that the landlord is willing to accept. It is common for the rental amount upon exercise of an option to be fir market value.

Does a Commercial Lease Have to Be in Writing?

Generally speaking, California law requires a commercial lease of real property to be in writing for the agreement to be enforceable, but only when the term of the lease lasts for a year or longer. This means that tenants and landlords can enter into verbal lease agreements for periods of a year or shorter and expect their agreements to be enforceable.

Should I Enter Into an Oral Commercial Lease?

Always consult with an attorney before entering into any legally enforceable agreement. Only a legal representative who’s on your side can offer the specific advice and guidance you need to make the right decisions for you.

That said, it’s generally ill-advised to enter into an oral commercial lease. This is because they are much more difficult to enforce, even if they can be enforced.

What Should I Do If I Have More Questions?

If you have more questions about commercial leases that we didn’t address above, please reach out to our attorney at the Law Office of Steven R. Lovett. We have more than 40 years of experience advising clients through complicated commercial real estate matters, including those concerning their leases.

Take advantage of a free telephonic consultation and request yours today by contacting us online!